RISK ASSESSMENT

Acute and far-reaching crisis

The economy, in crisis since 2014, is expected to remain in recession in 2018, under the impact of galloping inflation and declining oil and gas production. Despite the slow rise in oil prices, oil and gas production is likely to continue falling (-13.5% between October 2016 and October 2017) due to the lack of investment. As oil accounts for 90% of exports, 50% of budget revenues, and almost all of currency earnings, this decline in production is expected to worsen the existing macroeconomic imbalances. The non-oil economy is expected to contract further, suffering from a lack of investment, following years of neglect in favour of the oil and gas sector. The difficulty of obtaining intermediate products and capital goods is undermining industrial output, because the private sector depends on the state for access to foreign currency. This decline in productive capacities is taking place in a context of hyperinflation. The monetisation of the public deficit because of the decline in oil revenues has caused inflation to soar, exacerbated by the fall of the Venezuelan bolivar and rocketing import prices. In this context, household purchasing power continues to be seriously diminished. The shortage of everyday essentials is becoming increasingly severe, under the pressure of the government’s policy to drive down imports. Investment is likely to continue its decline in a business climate that is being undermined (arbitrary expropriations, intrusive checks, government inspections) and in a context of widespread political insecurity.

Fragile budget and external positions

The decline in oil revenues, together with the real-term reduction in non-oil revenues, has resulted in a rocketing of public deficit. However, the government has not reduced social spending in the same proportion. The deficit is largely being financed through monetisation, as well as via Russian and Chinese loans, subject to “loan against oil” terms. With Venezuela in default on its sovereign and quasi-sovereign (PDVSA) debts as of the 2nd November 2017, it is facing the need to restructure its debt in order to maintain its access to finance. Russia has granted a restructuring covering USD 3.15 billion relating to payments due over the next six years. However, achieving a more comprehensive restructuring appears to be more difficult following an unfruitful first round of meetings with its creditors. The existence of US sanctions against certain Venezuelan officials – including lead negotiator Tareck El Aissami, accused of drug trafficking – will prevent any US creditor from taking part in these negotiations.

In terms of the current account, the balance of trade should be slightly in surplus. This is a reflection of the contraction in imports (from USD 33.3 to USD 15.5 billion between 2015 and 2017) and a relatively stable level of oil exports, thanks to the recovery in oil prices. This surplus will not offset the deficit in services, linked with the collapse in tourism and the cost of oil industry engineering services, nor the high cost of debt servicing (USD 120 billion). The very low level of FDI and any bilateral loans will not be enough to bring the balance of payments into equilibrium. Currency reserves will continue to decline (USD 9.9 billion in November 2017, including gold), with any rebuilding being limited by the repayment in kind of Chinese and Russian loans, which leaves very little oil for sale to bring in enough foreign currency. This financing deficit is likely to continue to pull down the bolivar, further aggravating the gap between the official rate (VEB 10 for USD 1), used only for public transactions involving staples, and the parallel rate (VEB 103,000 for USD 1 at the end of 2017).

Tense political situation

2017 was a year of rising political tensions, an indication of the inability of the government to find a way out of the economic mess. The election of a Constituent Assembly in August 2017 was preceded by three months of conflict between government forces and supporters of the opposition, resulting in over a hundred deaths. This new assembly, which favours Nicolas Maduro (Partido Socialista Unido de Venezuela , PSUV) because it was boycotted by the opposition, has been trying to take power away from the opposition (Mesa Unitaria Democratica, MUD) dominated Congress, with an announcement of the dissolution of the latter in August 2017. The wave of international outrage following this and demonstrations within the country forced the government to step back, but without actually defusing the situation. Elections of regional governors in October 2017, largely won by the governmental party, strengthened the hand of President Maduro by highlighting divisions within the opposition. The decision by four governors, members of MUD, to be sworn in by the Constituent Assembly generated considerable disagreement within the coalition, as the vast majority of its members claim the Assembly is without any legitimacy. The victory of the PSUV in the municipal elections in December 2017, boycotted by the opposition, further exacerbated these tensions. Negotiations between the government and the opposition started in November 2017, with the government agreeing to intensify the fight against corruption, and the arrest of senior oil industry executives. With a divided opposition and an increasingly repressive use of power, the danger of political and social upheavals will continue at a high level until at least the next presidential election at the end of 2018.